Home Equity Loan Basics Home equity loan is a means through which the owners of homes can be able to access the cash that they have invested on their property. Equity is the market value of your home minus the outstanding balance on your home loan. For instance, if the house, which is your home, is valued at $300,000 and you have paid $200,000 for your mortgage, then your equity is $100,000. A home equity loan enables you to use the equity on your home to get a cash amount in a lump sum which you can use in any of the following ways.
What is a Home Equity Loan and How Does it Works? To obtain this loan, you need to approach a lender which is mostly a bank and make an application for the home equity. The lender will then estimate the value of your home to find the market value and to compute for the LTV ratio. This one compares the loan required with the amount of collateral available for the purpose of financing. The majority of the lenders offer financing of the property up to 80-85% of its value.
When reviewed and passed, your home is used to secure the loan with a second position behind the initial mortgage. The loan is granted in a lump sum of the approved amount and you can spend it on anything of your choice – home improvement, paying bills, college tuition fees, medical bills or any other expenses. You want and repay interest and principal in equal installments over a fixed term of 5-30 years.
Two Common Kinds of Home Equity Loans There are two primary types of home equity loans:
There are two primary types of home equity loans:
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Home Equity Line of Credit (HELOC): This is an open line of credit where one only pays interest on the amount used. It has the advantage of the ability to borrow more money or pay back the amount remaining as per the agreed draw period, often from 10 to 20 years. Once the drawing period is over, normal principal and interest payments are made. Interest rates are variable.
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Closed-End Home Equity Loan: This choice gives you a certain amount of money at once. You start making fixed payments in the form of principal and interest from the first month. The terms of maturity are normally within the range of five to ten and up to thirty years. Interest rates are fixed.
Getting Started with a Home Equity Loan If you are planning to take home equity loan, you first need to know whether you meet the minimum equity requirement. To find this, you’ll need to calculate what your home is worth in today’s market. Online market estimates can give a rough idea of the demand” However, to be sure, it is recommendable that you seek for the formal assessment of the property. An appraiser will consider your home in terms of its location, size, state of repair, and similar homes that have been sold in the market.
Second, verify the outstanding balance on your current mortgage. Take this away from the value of your home to determine the equity that you have. If you own a home that is worth $350,000 and you owe the bank $150,000 then the equity you have is $200,000.
Thus, with this equity established, you can set a loan goal. As mentioned earlier, most of the lenders lend upto 80-85% of the available equity in the property. For instance if you have $200,000 in equity, you could borrow between $160,000-170,000 in home equity loans.
When setting your target loan amount, be sure to consider:When setting your target loan amount, be sure to consider:
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The fact that you can afford to pay potentially higher monthly payments depending on the term and rate of your loan. Can the cost of some of other items be reduced in case the need arises?
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Closing costs – you will have several thousand dollars in fees to close on a home equity loan.
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How fast you want to clear the loan balance. The longer the term, the lower the monthly payments but more accumulated interest to be paid.
Consider your own personal capacity in terms of finance, requirement, and risks before deciding on the loan amount and the terms that apply to your case.
Advantages of Home Equity Loans If used responsibly, a home equity loan offers several valuable benefits:If used responsibly, a home equity loan offers several valuable benefits:
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Additional cash without the need to give up your home or refinance your primary loan. This means that you can use equity for cash requirements while retaining the initial loan.
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Interest that may or may not be tax deductible depending on how the proceeds of a loan are utilized. Interest can be tax deductible if you are using the money to renovate your home or significantly alter it. For clarifications on qualifications, it is wise to seek advice from a tax specialist.
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Usually less rigorous to secure when compared to other funding avenues because your house is used as security. The lenders consider home equity loans to be safer.
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Fixed interest rates that are lower than other loan products such as credit cards, personal loans and auto loans and this can amount to a lot of savings on the amount of interest that is charged on the loan throughout the loan period.
Downsides to Consider While home equity loans offer useful flexibility, there are some cautions too:While home equity loans offer useful flexibility, there are some cautions too:
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This means that you are putting your home at risk in the instance that the payments for the loan are no longer manageable. They knew that defaulting could lead to foreclosure. It important that one understands that home equity loans have very severe repercussions if not paid adequately.
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Interest and other closing costs can become a real issue that detracts from the overall value of the loan. They are simple but have to be very well planned and a good payoff plan is very important.
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Home equity borrowing decreases the equity amount owed to you in the future when you decide to sell the home.
In sum, home equity loans enable owners to selectively use their property’s equity. But like any loan, you undertake repayment commitments which should reasonably fall with your financial capacity. One must give careful consideration to the advantages and disadvantages for their individual situation before proceeding. Handle payments prudently throughout the loan period to reduce the interest expense when you require funds for your goals.
Conclusion Home equity loans provide homeowners with chances to utilize one of the most valuable assets they own the house – as collateral to obtain a single cash payment. Knowing the qualification criteria for a loan, being realistic about how much one can borrow, and considering short and long term trade offs, a borrower can effectively use equity to his advantage to achieve his goals. Just like any other financing decision, it is advisable that one considers the current income, expenses and obligatory debt repayments while considering a home equity loan to ensure that the product suits the current financial status of the individual.
